16

I've been working for an employer for the last 8 years and there are rumors that the company will be coming up with an IPO very soon. If the rumors turn out to be true, how does it impact me (either positively or negatively) as an employee?

The company has grown tremendously the past few years and I am excited to be a part of its growth. I haven't been granted options. Is it a norm for the management to offer shares of the company to employees based on their tenure? What other changes can I expect? Thanks for reading.

1
  • 6
    Welcome to The Workplace Dotnet Dude! This is a tremendous question, and I can't wait to see the answer. Hope you stick around. Thanks for the great first contribution! Just as a warning though, you may want to disconnect this from your other account on OnStartups, as that has some details about your location, and your business realm, etc. which may identify you (you can flag your own post with a custom message for the mods if that is your desire).
    – jmac
    Oct 24 '13 at 5:36
11

It really all depends on the intent and structure of the IPO. Here are some of the things that can happen.

  1. IPO is largely for raising some cash to get more breathing room. Current ownership stays at the helm and maintains control: this scenario will probably result in the smallest number of changes.
  2. Current ownership/leadership cashes out and rides into the sunset: This is on the other end of the spectrum. Massive changes, new ownership, new management, etc. Can result in a completely different company or no company at all.
  3. Anything in between. New stakeholders could mean different set of directions and some change in company governance and leadership. New cash could mean expansion and new investments. Stock options will entice people throughout the organization to cash in and they may or may not stick around.
8
  • What's the general rule with stock options? When are they awarded and when can they be cashed? Are they granted based on how long an employee has been with the company or the employee's designation?
    – DotnetDude
    Oct 24 '13 at 11:46
  • @DotnetDude - They are offered as compensation during hiring and occasionally during your yearly review. If you don't have them, you very likely won't get them. As for cashing them, some IPOs place a limit on the sales date (~6-12 months is what I've seen) but it varies on the company and the class of your stock.
    – Telastyn
    Oct 24 '13 at 13:31
  • @telastyn Are you sure that none of the pre ipo employees get any stock if they already don't own them? The company is driven by a handful of individuals who probably own stake in the company and they make up only 1% of the total work force. Will the rest of them not be benefited financially by this move?
    – DotnetDude
    Oct 24 '13 at 13:42
  • 2
    @DotnetDude - What happens is really a case by case thing. Its certainly not typical to provide an employee who does not already have stock options, IPO stock, because thats just giving away money basically.
    – Donald
    Oct 24 '13 at 14:37
  • 1
    @DotnetDude - I'm not sure but in my experience, only the first 20 or so employees (and valuable employees/upper management) get options as motivation to take less salary during the startup period. The rest of the workforce will not benefit with an IPO (except that the company is more financially stable and/or growing, which can create career opportunities).
    – Telastyn
    Oct 24 '13 at 15:21
6

It sounds to me that you are not quite clear on what the difference is between an IPO, stocks, and stock options.

I am not a certified financial adviser, but here is a VERY rough overview of them.

  • Stocks. Stocks are shares of a company. They document a percentage of ownership of the incorporated entity. Shares can be either publicly or privately traded. Privately held companies' shares are usually traded among a very small number of people. Usually the partners who formed the company and some "angel investors" who funded the initial version of the company. Privately held companies' share-trades are not regulated by the Securities and Exchange Commission, but are still regulated by state and federal regulations.

  • Stock Options. Options are an offer to sell a specified range of shares at a certain price on or before a certain date. They can be valuable if the stock's price rises higher than expected. If you are offered an option to buy 100 shares at $10 each on or before January 1st of 2015, and when that date comes the shares are worth $20 each, you can buy the 100 shares for $10 per and sell for $20 per, netting $1,000 (minus trading fees, of course). If the stock is only worth $5 on 1/1/2015, you are not required to purchase at $10 per, thus the term "Option."

  • IPO - Initial public offering. A company is valued by underwriting financial institutions and certified to the Securities and Exchange Commission. Shares are issued based on the percentage of the company that is being "Offered" for public trading. As of that moment, all significant financial dealings and all intended and actual share trading by senior management and board members are required to be reported to the Securities and Exchange Commission quarterly, annually, and a whole new regulatory environment is entered.

When a company "Goes IPO," employees are often given the opportunity to buy a limited number of shares at the initial offer price. They are sometimes given the opportunity to buy at that price for several months after the IPO in the form of stock options. The reason for this is that it's actually quite difficult to buy a stock on its IPO. You have to be well-connected. Usually you will end up buying them after they've traded hands through a brokerage or two. The "buzz" around IPO's is that if investors feel a company was undervalued by the underwriters of the IPO, the stock will immediately go up. The $10/share IPO may be trading at $11.50 later that day, and whoever got the $10 shares makes a good profit. It's hard to be in that group, so that's why employees are sometimes given a chance to "cut in line" and get the IPO price for a limited number of shares.

Now unless you seriously know what you're doing in the markets, you really don't want to try to time your transactions by buying at pre-IPO and selling a few days later. Also, if 500 employees each got 5000 IPO stock options, and they all buy them on Monday and sell them on Thursday, that can seriously distort the stock's trading performance. That's why there's usually a restriction on how long you have to hold pre-IPO purchased shares before you are allowed to sell them.

Now as verbose as the above is, it represents a tiny amount of the information you need to know about investing in the company you work with. I strongly recommend consulting with a licensed broker or certified financial planner before making any decisions. However, be aware of your Non-Disclosure requirements with your company at the same time. If you tell a broker, "My company's doing an IPO next year, and I wonder if ...." Guess what the broker heard? "Company XYZ is going IPO next year." He's going to use that. Make sure you're not violating any NDA's.

2
  • 1
    It's worth pointing out that employees at a company that goes public are, in many cases, subject to a trading window that would prevent selling shares shortly after an IPO.
    – Blrfl
    Oct 26 '13 at 15:37
  • @Blrfl - I did, at the end of the penultimate paragraph, but I probably should have spent more time on it. Of course, I put in 8 paragraphs what is a 10-hour lesson. :) Oct 27 '13 at 21:04

You must log in to answer this question.

Not the answer you're looking for? Browse other questions tagged .